Index Insights: Stratified LargeCap Q4 and 2023 Review

Executive Summary

• The Stratified LargeCap Index (SYLC) returned 10.9% in Q4 vs. 11.7% for the S&P 500.  SYLC realized outperformance in 16 of the 24 Level 2 sub-sectors relative to the S&P 500, but underperformed the S&P 500 due to its lower weight to tech stocks.  

• 2023 was largely a reversal of 2022. The S&P 500 returned 26.3% for the year after a decline of 18.1% in 2022. SYLC returned 14.1% in 2023, underperforming the S&P 500 by 12.2 percentage points. In 2022, SYLC returned -8.8%, outperforming the S&P 500 by 9.3 percentage points.

• SYLC returned 4.1% and 10.4% annually over the past two and three years, respectively, outperforming the S&P 500 by 70 basis points over the past two years and 40 basis points over the past 3 years.  

• The results are consistent with expectations as SYLC works well as a diversification strategy during market reversals, but not in momentum driven markets like the first half of 2023 where performance was driven by the “Magnificent Seven.”  

Domestic Equity Market Performance Summary

For 2023, large cap stocks (+26.3%) outperformed mid cap (+16.4%) and small cap stocks (+16.1%) as measured by the S&P 500, 400 and 600, respectively. Within large cap stocks, growth (+30.0%) outperformed value (+22.2%).  

Within the cap weighted indices, Q4 saw small cap (+15.1%) stocks outperform both large cap (+11.7%) and mid cap (+11.7%). Within large cap, value (+13.6%) outperformed growth (+10.1%) growth.  The prospects of lower interest rates in 2024 helped all the indices shown in Exhibit 1 post strong results, more than offsetting the negative returns realized in Q3.  The broad market posted strong returns in Q1 and Q2 as well, with large cap growth leading the way.  

Asset Allocation: Stratified LargeCap vs. S&P 500

The goal of the Stratified LargeCap index is to deliver an unbiased return that is representative of all the business opportunities in the market, not just the largest ones. The index holds the exact same stocks as the S&P 500; the only difference is the weighting scheme. To reduce sector concentration risk, each of the eight primary Syntax FIS sectors is assigned an equal weight of 12.5% of the index. As you can see in Exhibit 2, the SYLC primary sectors (shaded in grey) have similar weights, with the differences being tied to market movement between the latest quarterly rebalance on 12/15/23 and yearend. This principle of equally weighting sectors is extended to sub-sectors, industry groups, sub-industries and business activities to enhance diversification not only at the sector level, but at the lower levels as well.

Exhibit 2 compares the asset allocation of Stratified LargeCap to the S&P 500. The table includes subsector weights to provide more insights into the exposures in each index.

Comments: SYLC vs. S&P 500

• SYLC’s largest underweight is to the Information Tools sector, driven mostly by SYLC’s underweight to mega-cap stocks Apple, NVIDIA and Microsoft.

• The underweight to the Information sector is driven by the S&P’s large positions in Amazon, Alphabet and Meta Platforms, all of which are in the Internet Services and Websites sub-sector.

• Healthcare and Industrials primary sector weights are similar for SYLC and S&P 500.

• There is an overweight in SYLC to Financials tied to higher levels of Real Estate and Insurance exposure.

• The S&P 500 has modest exposure to the Consumer, Energy and Food sectors, whereas SYLC has a target weight of 12.5% for each of these sectors, which are meaningful components of the US economy.  

• The S&P 500's weight to Microsoft and Apple are both ~7%, which is greater than the individual weights of the Consumer, Energy and Food sectors.  

• The largest weighted security in SYLC is 80 basis points, while the smallest is 4 basis points

Q4 Performance by Sector

Exhibit 3 looks at the performance of Stratified LargeCap relative to the S&P 500 by primary sector, with the results sorted from highest to lowest based on the SYLC results.  The Financial sector returned 19.1% for the quarter as interest rate sensitive stocks outperformed based on the prospect of declining interest rates in 2024.  Information Tools, which includes Software, Hardware and Integrated Circuits companies, was the next best performing sector at 16.4%. Food and Energy trailed with returns of 5.6% and 3.6%, respectively.  SYLC outperformed the S&P 500 in five of the eight primary sectors.

Q4 Performance by Sub-Sector

Sector level results can sometimes be misleading since they represent a roll-up of the underlying sub-sectors where performance can vary materially. In Exhibit 4, we rank the 24 sub-sectors performance from highest to lowest based on their Stratified LargeCap results, which are also compared to the S&P 500.‍

The top two performing sub-sectors were Banking (+26.2%) and Real Estate (+22.2%).  Integrated Circuits ranked third (+19.7%) as chip makers benefited from the continued investor demand for stocks with exposure to AI and the CHIPS and Science Act of 2022.  Apparel and Accessories was up 17.4%, aided by Lululemon’s over 30% return. Software gained 14.8% rounding out the top 5 sub-sector performers.  

Declining oil prices created pressure on the Oil & Gas sub-sector which produced the only negative return amongst the 24 sub-sectors.  Overall, 15 of the 24 SYLC subsectors outperformed the S&P 500 during the quarter.  

2023 Performance by Primary Sector

The strong performance of the S&P 500 for 2023 was driven by what has become to be known as the Magnificent Seven (Apple, Microsoft, Meta Platforms, NVIDIA, Amazon, Alphabet and Tesla). These seven stocks accounted for 64% of the return of the S&P 500 in 2023.   The impact of these stocks is shown in Exhibit 5, which displays the 2023 returns for Stratified LargeCap and the S&P 500 by sector.  

The top two performing sub-sectors in both indices were Information Tools and Information.  The S&P 500 outperformed SYLC by a wide margin in both as Microsoft, Apple and NVIDIA drove the outperformance of the Information Tools sector. Amazon, Google and Meta Platforms led the performance of the Information sector, with Meta Platforms up 154% for the year.  

While a small group of tech stocks were responsible for much of the market return in 2023, the Industrial and Financials sectors also performed well with each returning roughly 14%. Food, Energy, Healthcare, and Consumer stocks (excluding Tesla) overall posted modestly positive or slightly negative results depending upon the index.      

2023 Performance by Sub-Sector

The disparity in returns by sub-sector in 2023 was enormous as shown in Exhibit 6. Integrated Circuits was the top performer returning 58% in SYLC and 101% in the S&P 500, with the S&P 500 results driven by the over 200% return realized by NVIDIA for the year.  Internet Services and Website companies were the second highest segment, returning 47% in SYLC and 78% within the S&P 500.  

In the prior section we noted Financials had a strong year, up 14% in SYLC and 12% in the S&P 500; however, returns within the sector deviated meaningfully. Real Estate returned 33.5% within SYLC, while Insurance was up 9.7% and Banking was down 3.1% (even with the +26% return Banking saw in Q4!).  Similarly, in the Food sector, Food Sales, which consists of companies that retail, wholesale or distribute food, including restaurants, was up 17%. This is in contrast to Food Production companies, which were down 8%, the worst performing sub-sector in SYLC.

Overall, within SYLC, 18 sub-sectors produced positive results while six were negative.  Compared to the S&P 500, SYLC had 12 sub-sectors that underperformed and 12 that outperformed; however, the magnitude of the underperformance in the five sub-sectors tied to the Magnificent Seven (Integrated Circuits, Internet Services and Websites, Software, IT Hardware, and Transportation) lead to substantial underperformance for the year.  

Overall, 2023 was a reversal of 2022 where the largest tech stocks led the market down 18%. Over the last two and three years, SYLC has outperformed returning 4.1% and 10.4% annually compared to the S&P 500's returns of 3.4% and 10.0%, respectively.  

Technology Exposure in Stratified LargeCap and the S&P 500

The concentration risk to tech stocks in the S&P 500 receives considerable attention, but is typically understated due to how traditional industry classification systems classify certain companies. For example, within the GICS classification system, Amazon is placed in the Consumer Discretionary sector, not the techier IT or Communications sectors. In Syntax’s FIS industry classification system, Amazon’s primary classification is in the Information sector driven by its Internet Services and Website business lines.  

Also missed in the traditional classification process are the companies that have tech exposure in their secondary and tertiary business lines that are not accounted for as most reported exposures are based on a company’s primary business classification.

Syntax addresses these shortcomings by creating a technology lens that cuts across sectors and aggregates exposure based on product line detail.  Exhibit 7 shows the S&P 500's exposure to technology over time. At the beginning of 2022, the exposure to technology was 42%, as the market corrected in 2022, the total exposure to technology fell to 35% at year end. With tech leading the market up in 2023, tech exposure increased to 44%, an all-time high, and sustainably higher than the 29% allocation to the Information Technology sector as reported using the GICS industry classification system.  

Conclusion

The rising domestic equity markets in 2023 were a mirror image of the falling markets in 2022. Concerns around tech valuations and rising interest rates drove the market down in 2022, only to see the buzz surrounding AI and the prospective of falling rates drive markets forward in 2023. The yo-yo market over the past two years resulted in Stratified LargeCap returning 4.1% annually, outperforming the S&P 500 by 70 basis points. Interestingly, a blend of 50% Stratified LargeCap and 50% cap weighted S&P 500 proved to be complementary over the past two years.  The diversified business risk profile of Stratified LargeCap provided downside protection in 2022, whereas the cap weighted S&P 500 benefited from its growth and tech bias in 2023.  Even though both indices hold the same securities, the stratified weight portfolio construction process helps provide balance to the S&P 500. As we look toward macroeconomic uncertainty, geopolitical instability, and market anxiety in 2024, we believe the Stratified LargeCap Index remains well positioned.

Appendix: Additional Performance Information

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About Syntax

Syntax LLC is a financial data and technology company that codifies business models. Syntax operates through three segments: Company Data, Wealth Technology, and Financial Indices. Using its patented FIS® technology inspired by systems sciences, the Company Data segment offers the most comprehensive, granular, and accurate product line revenue data available on the market. The Wealth Technology segment then uses this abundance of data to facilitate the instantaneous creation and ongoing management of direct indexing solutions and rules-based equity portfolios through a fully automated platform. The Financial Indices segment enables Syntax to deliver customized and proprietary indices, including core global benchmarks and micro- and macro-thematic, smart beta, defined outcome, and target volatility indices. These indices are foundational for a range of financial products, such as ETFs, UITs, and structured products. Learn more at www.syntaxdata.com.

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Important Disclaimers

Past performance is no guarantee of future results. All performance presented prior to the inception date is backtested performance. Backtested performance is not actual performance but is hypothetical. The inception date of the Syntax Stratified LargeCap Index was December 27, 2016. The backtest calculations are based on the same methodology that was in effect when the index was officially launched. Back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. Charts and graphs are provided for illustrative purposes only.

The Syntax Stratified LargeCap Index (“the Index”) is the property of Syntax, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Index. The Index is not sponsored by S&P Dow Jones Indices or its affiliates or its third-party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Syntax, LLC. S&P® is a registered trademark of Standard & Poor's Financial Services LLC (“SPFS"), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Syntax®, Stratified®, Stratified Indices®, Stratified Weight™, and Locus® are trademarks or registered trademarks of Syntax, LLC or its affiliate.

Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Syntax Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however, that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown. Benchmark data for the S&P 500 is provided by S&P Dow Jones Indices.

This report is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this presentation has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used in this presentation, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

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